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Roundtable

What Is the Key to PEMEX Deepwater Success?

Wed, 01/25/2012 - 14:30

Juan Carlos Zepeda Molina, President of the CNH, believes that the current legal framework created by the 2008 Energy Reform can be accommodated for contracts for exploration and development fields in deepwater projects. This can be done by introducing venture capital from Pemex; nevertheless, the ideal solution would be to reform the Constitution to allow risk contracts. “This is an important point to stress, because there are some limitations in the contracts, which have created debate about whether these contracts will work for projects involving exploratory risk,” Zepeda Molina explains.

Juan Carlos Zepeda Molina

President
CNH

Juan Carlos Zepeda Molina, President of the CNH, believes that the current legal framework created by the 2008 Energy Reform can be accommodated for contracts for exploration and development fields in deepwater projects. This can be done by introducing venture capital from Pemex; nevertheless, the ideal solution would be to reform the Constitution to allow risk contracts. “This is an important point to stress, because there are some limitations in the contracts, which have created debate about whether these contracts will work for projects involving exploratory risk,” Zepeda Molina explains. 

The President of the CNH goes on to say that the main debate around the incentive-based integrated service contracts centres around the fact that they do not allow Pemex to share the potential upwards movement of the oil price with its project partners. Zepeda Molina points out that the two variables in an exploration project are the size of the field to be discovered and the price of oil in the marketplace once production begins. A high oil price can compensate for a small field, but because Pemex is not allowed to share the upward movement of the oil price, they are unable to compensate in a scenario where the field size is small. This means that the contract is essentially unbalanced for projects involving exploratory risk.

“Does this mean that it will be impossible to use these contracts for exploration? No. It will pose some challenges and difficulties, but we can overcome them. For exploratory projects, Pemex will need to participate fully with their own venture capital. In order to do this, my recommendation is that Pemex creates a separate deepwater subsidiary, which will then be able to enter into joint ventures with companies like Petrobras. By creating this separate subsidiary, Pemex will be able to share the risk with its partners that would otherwise be wholly borne by the contracting partner. So, deepwater exploration collaborations will be possible under the current legal framework,” says Zepeda Molina

Rogelio Gasca Neri

Rogelio Gasca Neri

Professional board member
Pemex

“Deepwater development requires a different legal framework to the one Mexico currently has due to several factors, the first of which is financial,” says Dr. Rogelio Gasca Neri, professional member of the Pemex board. “Onshore and shallow water wells have a much higher success rate and cost much less than deepwater wells. It is a high-risk activity requiring high-capital investment, and it will take a long time before Pemex sees a return on investment.”

Gasca Neri believes that under the current budgetary structure of Pemex, creating a long-term plan for deepwater development will be a major challenge, as budgets are calculated annually, and the Pemex board member believes that in order for deepwater development to be successful, longer term guarantees need to be put in place. “We have to have a new legal framework, and this is not something that Pemex can do anything about – it has to come from the next President, or this one. Pemex needs to know what it should be aiming for in the long-term, so that it can begin the hard work that needs to be done to develop these complex assets.”

The recent signing of the Transboundary Hydrocarbons Agreement should play an important role in helping Mexico develop its deepwater resources, according to Gasca Neri. “The work that still needs to be done by Pemex before it can start to properly explore its deepwater potential includes putting production procedures in place, learning how to complete wells, put safety procedures in place to prevent accidents, and creating policies to respond to worst-case scenarios if accident were to occur. The new agreement signed with the US will help Pemex develop in these areas tremendously, as we will have to put in place the same regulations as the US on any cross-border developments, and this should help us develop a comprehensive strategy for all our deepwater projects.” Gasca Neri adds that joint inspections will help to make sure that the strategy is implemented at these projects.

Marta Jara Otero

Marta Jara Otero

President and Director General
Shell México

Marta Jara Otero, President and Director General of Shell México, says that currently, planning for participating in Mexico’s eventual deepwater development is not an easy thing to do: “The uncertainty and timing of Mexico’s deepwater projects makes preparing for them a tricky issue. There is a lot of competition in the world these days, and expert resources are scarce, so it is difficult to have people on standby or looking at things for the future. We don’t have any doubt that things will happen in Mexico; it is more a matter of how we are choosing to deploy our resources in order to maximise efficiency.”

Despite this complexity, Shell is excited about the potential of future collaborations with Pemex in order to help them develop their deepwater reserves. However, any development will have to include an element of risk-sharing, as Shell does not want to be considered simply as a technology provider. “Our model is to invest, and bring our technology as part of what is needed to generate value. Our model is not to sell technology. There are very scarce resources, and in many of these developments, especially at those depths, there are always solutions tailored to that particular challenge. It requires a lot of work, R&D, investment and so forth, so we also have to prioritize how we deploy our experts and our resources.”

Jara Otero believes that if the contracting model were right, Shell would be an ideal partner for Pemex. The IOC has the largest presence out of all of its competitors in Mexico, due to the relationship the company has with the Federal Electicity Commission (CFE). Jara Otero says that this presence, complemented by strong technical backup from the company’s Houston office, would help Shell meet the ramp up requirements of a deepwater project in Mexico. “Shell has been a leader in deepwater exploration and production for over 30 years; our projects have two things in common: significant increments in water depth and the deployment of increasingly complex technology. Our extensive experience in deepwater exploration, combined with proprietary technology, enables Shell to identify and develop the most promising deepwater acreages throughout the world.”

Jaime Buitrago

Jaime Buitrago

President
ExxonMobil Ventures México

“Both the US Geological Survey and Pemex have made public estimates of potential resources in the deepwater areas of the Mexican portion of the Gulf of Mexico,” says Jaime Buitrago, President of ExxonMobil Ventures México. “However, I would like to point out that the level of knowledge in the Mexican side is much less than the knowledge that has been acquired through industry activity on the US side. This means that there is a lot more uncertainty over the amount of resources that could be found in the Mexican sector of the deepwater Gulf of Mexico.”

Buitrago believes that ExxonMobil is ideally placed to partner with Pemex on its deepwater projects, given the experience in deepwater project planning the company has, the cost-effective drilling programmes it has completed, and its access to proven deepwater technologies. Buitrago points out that in the last decade, ExxonMobil has drilled 7,778 wells, of which 262 were in water depths of more than 760m.

Buitrago believes that safe development of Mexico’s deepwater assets should be Pemex’s priority. He comments “the tragic incident of Deepwater Horizon is a reminder that we must always be vigilant in the areas of safety and environmental protection. The report of the US Presidential Commission into the Deepwater Horizon incident concluded that the disaster was avoidable, and resulted from a specific series of management failures on the part of the companies involved. Based on extensive experience, we know that when wells are properly designed with a range of risks anticipated, when established procedures are followed and layers of redundancy are built in, tragic incidents like the one we witnessed in the Gulf of Mexico should not occur. We have drilled over 35 wells in water deeper than 1,200m in the Gulf of Mexico over the past decade. We agree that the industry has a fundamental role to play in ensuring that safety and environmental standards are maintained and strengthened.”